Breakfast With Dr. Jeremy Siegel Part 3

This is the last in the series of posts that conveys some of the findings and musings of Dr. Jeremy Siegel, whom I had the pleasure of hearing speak while in St. John’s, Newfoundland. A reader pointed out that the long term returns going forward may not be as high as during the last 200 years, and Dr. Siegel would agree. His study of the US market from 1802 to 2007 showed that the real rate of return (subtracting inflation) was 6.8%. However, he believes that the forward rates of return based on 2008 data available to him would suggest a range of 4.8% to 6.3%. (The source or calculations on that data were not specifically indicated, I imagine they are in his new book: The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New.

But probably the most interesting part of his presentation was his study of the demographics of investors in the United States (and by extension Canada). Back in 1950, the average age someone retired was 67.4 while their life expectancy was 69. This represents an average retirement length of 1.6 years.

Today the average length of retirement is 15.7 years. This in itself explains most of the reason defined benefit pension plans have lost popularity and more and more companies embraced defined contributions plans.

Further, in 1950 there were 7 workers per every retiree. In 2007 that ratio decreased to 5 workers for every 1 retiree and in 2050 it is predicted to fall further to only 2.5:1. Statistically, he figured that the average length of retirement would have to come down from the current 15.7 years to 11.6 – meaning that people will have to forget about retiring early (and since we’ll be living longer by then, even 65 would be early for most).

With fewer workers per retiree, the savings of those who are approaching or in retirement will be worth less from a pure supply and demand point of view. Workers are generally the ones who buy the assets of the retired (in order to save for their own retirements), but as the ratio of workers to retirees declines, demand will dry up relative to supply.

Our saving grace? The emerging economies’ workforce who will need to buy assets from the West to save for their retirements, so long as the mechanisms for them to do so are improved (i.e. less barriers to retail capital flows through international securities markets).

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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